Government Encouraging Smaller Cars, Improved Fuel Efficiency

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In early January, China called for a nationwide repeal of restrictions on smaller, more economical cars by the end of March in a move to ease the country's growing dependence on imported oil. At least 84 Chinese cities have banned the small cars, using justifications ranging from noise and air pollution to their poor power and safety records and less attractive appearance. However, small cars are becoming increasingly popular in the marketplace in the face of soaring oil prices, more frequent power shortages, and stringent new fuel economy standards. As the central government takes steps to reduce China's oil consumption and greenhouse gas emissions, small cars are expected to eventually become the mainstay of the domestic auto industry.

In recent years, China's burgeoning car fleet has driven up domestic demand for oil as consumers have opted for large sedans at the expense of smaller models. Data from the National Statistic Bureau show that the number of private cars in China nearly tripled between 2000 and 2005, from 6.25 million to 17 million. These vehicles now account for one-third of all oil imports. High vehicle fuel consumption has also contributed to the nation's oil shortage, with Chinese models manufactured before 2001 guzzling 20-30 more fuel than their foreign counterparts, according to the China Automobile Technology and Research Center.

China's renewed interest in small vehicles is driven in part by new fuel economy standards, issued by the government in late 2004 as a way to address soaring oil consumption and to attract more advanced technologies and an efficient fleet. The new standards are slightly more stringent than U.S. regulations, though less stringent than those in the European Union and Japan. Designed to be "bottom heavy," they require the greatest improvements to be made in the heaviest vehicles. Currently, however, only about 4 percent of sport utility vehicles (SUVs) and minivans sold in China meet the 2005 standards, according to the World Resources Institute.

China's new fuel economy rules will likely disrupt the plans of foreign auto manufacturers who had hoped to introduce larger and more powerful vehicles into the Chinese market. But they will encourage development of China's domestic small vehicle industry. Statistics from the China Association of Automobile Manufacturers show that already, cars with a capacity of less than 1.6 liters accounted for 66.1 percent of sales of domestically produced passenger vehicles in the first 11 months of 2005, compared with 62.5 percent in 2004.

Under the new small car initiative, China's central government is developing and implementing a series of plans that favor low-emission and economical vehicles. A new auto consumption tax scheme, for instance, will slash taxes on low-emission vehicles and raise taxes on high-emission vehicles, in a move to encourage the use of smaller models. Other plans include lower parking charges for small vehicles, the use of small vehicles for taxi services, and a preferential oil-pricing policy. In light of these and other initiatives, a growing number of manufacturers are increasing investments in the development and production of environmentally friendly and low-emission engines and automobiles.

Enactment and enforcement of the policy's detailed rules will be critical to the success of the small car initiative, however. Currently, the definitions of "economical" and "low-emission" are vague and need to be clarified, given that low-emission cars are not necessarily economical, and that "economical" cars should be required to meet other standards than achieving low emissions. Specific details on enforcement and the penalties for non-compliance with the new policy have also not yet been announced, leaving the strength of the ruling in question.

Worldwide, a variety of approaches have been introduced to reduce automobile fuel consumption, including fuel economy standards, fuel taxes, and technology mandates and targets. Fuel economy standards have proven to be one of the most effective tools to control oil demand, and have been implemented in nine regions: Australia, Canada, China, the European Union, Japan, Korea, Taiwan, and the United States. While the European Union and Japan have the most stringent standards, the U.S. rules have been largely stagnant over the past two decades.